Smaller businesses have been finding it hard to get the finance they need to create more jobs and money. A substantial new growth fund aimed at small business would help power Britain out of Labour’s recession.

SMEs, business with less than 250 employees, have been struggling to get the finance they need to grow. The latest Bank of England lending trends highlight how lending to smaller businesses has reduced and the chart below from the report shows how tough things have been for smaller businesses.

Yet SMEs account for 6 out of 10 jobs and half the nation’s private sector turnover. They have a key role to play in getting Britain growing again after Labour’s recession. With greater access to capital – equity as well as loans – SMEs would be in a stronger position to invest in the future.

A growth fund could provide that capital. This is different from simple small business debt finance where security is so often required. The purpose of the fund would be to assess the quality of the business rather than the quality of the security (i.e. look at the business plan rather than the director’s family home). It would be to provide intermediate and equity finance. Indeed, Labour dipped a toe in the water with a small scale £75m fund called the Capital for Enterprise Fund.

The growth fund would be invested by fund managers from the City, not by Government. SMEs would apply to the Growth Fund for capital and have to make their case on solid business principles, dragon’s den style.

To make a difference the growth fund would need to be substantial. We know that public money is scarce. Any public contribution would likely be limited. And we know the banks proposed a £1.5bn fund for lending to smaller businesses. Yet there is a concern that, whatever they may claim, the banks would earmark the funds for property development and suchlike rather than true business venture risk that will create the jobs and money we need. We know the Project Merlin talks continue and those talks may produce more finance to help business.

Let’s say the deal for bank rehabilitation ends up with banks making £2.5bn available for a Growth Fund. Clearly it should be held separately and managed separately from the banks to win trust. How could the amount available be increased? Float the fund. Then pension funds would be able to invest in the recovery, as would individuals. We should be looking for a substantial contribution from pension funds to invest in our future at home rather than overseas. In this way, the fund could increase substantially. It is then perfectly possible to raise matching funds in the money markets, creating a fund of between £5bn and £10bn. That kind of money, targeted at smaller businesses, would make a real difference and build confidence in our future.